Covered call exchange-traded funds (ETFs) have quickly grown in popularity as investors search for ways to boost yield in uncertain markets. A covered call ETF essentially trades upside price appreciation for above-average income generation.
The rise in covered call ETFs became especially noticeable after the 2022 bear market, when these funds outperformed broader equity benchmarks due to their ability to capitalize on elevated market volatility. Investors were drawn to their high-income potential, often yielding far more than traditional dividend ETFs.
Because the Nasdaq-100 is more volatile, dominated by tech and growth stocks, this ETF collects larger option premiums. That's why its 12-month yield has been higher, at 11.83%. But just like the other ETF, its upside is capped. The ATM strike means that gains beyond the call option are forfeited each month.
Over the last 10 years, this ETF has returned 8.79% annualized, with reinvested distributions. The higher yield may appeal to income-focused investors, but the trade-off is limited capital appreciation.
3. JPMorgan Equity Premium Income ETF
The JPMorgan Equity Premium Income ETF (JEPI +0.02%) is the largest covered call ETF on the market, with more than $42 billion in assets under management. Unlike the previous two ETFs discussed here, which follow a strict index approach, this ETF is actively managed and takes a more nuanced approach to generating income.
NYSEMKT: JEPI
Key Data Points
It starts with a portfolio of defensive, low-volatility stocks, aiming to reduce downside risk. But it doesn't write covered calls directly on these stocks. Instead, it allocates about 15% of its portfolio to equity-linked notes (ELNs), which are custom over-the-counter structured products that mimic the return profile of one-month out-of-the-money (OTM) covered calls on the S&P 500.
This approach allows this ETF to collect options premiums while preserving some upside, which helps explain its stronger total returns. Over the last five years, it delivered a 9.41% annualized return.
Like the previous ETF, it uses ELNs to implement a one-month, OTM covered call strategy, but this time on the Nasdaq-100 index. The higher volatility of tech and growth stocks translates to larger premiums, which is why this ETF currently sports a 11.58% 30-day SEC yield. Its expense ratio is 0.35%, matching its relatively low cost for an active strategy.
Although it's a newer fund with limited history, this ETF has shown promise. Over the last three years, it has returned an annualized 24.14%. As with the JPMorgan Equity Premium Income ETF, investors should understand the trade-offs. ELNs carry counterparty risk, and the distributions are tax-inefficient, mostly classified as ordinary income.
5. NEOS S&P 500 High Income ETF
The NEOS S&P 500 High Income ETF (SPYI -0.21%) is a newer entrant in the covered call ETF space, with a unique hybrid approach. It passively holds S&P 500 stocks as its equity base but actively manages the options overlay, buying and selling S&P 500 index options (SPX).
NYSEMKT: SPYI
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This structure gives this ETF two key tax advantages. First, SPX index options fall under Section 1256 of the tax code, meaning that gains are taxed on a 60/40 split -- 60% long term, 40% short term -- regardless of the holding period, often resulting in a lower effective tax rate.
Second, because of how the fund manages its options and capital gains, a significant portion of its 12.04% distribution yield is classified as return of capital, which is tax-efficient since it reduces your cost basis instead of generating immediate taxable income.
While it carries a slightly higher 0.68% expense ratio, the fund's performance since its August 2022 inception has been strong. It delivered a 14.72% annualized return, outpacing the CBOE S&P 500 BuyWrite Monthly index, which returned 11.43% over the same period.
This ETF may appeal to investors who are looking for tax-smart high income without giving up entirely on growth potential, as well as those who are comfortable with a newer fund.
6. NEOS Nasdaq-100 High Income ETF
This covered call ETF passively holds stocks from the Nasdaq-100, allowing for tax-loss-harvesting opportunities, while actively managing an options overlay using NDX index options, which, like SPX, are Section 1256 contracts. Given the Nasdaq-100's higher volatility, the NEOS Nasdaq-100 High Income ETF (QQQI -0.92%) can generate larger option premiums, which explains its elevated 14.11% distribution rate.
NASDAQ: QQQI
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Like the NEOS S&P 500 High Income ETF, a meaningful portion of those distributions is classified as return of capital, which can help defer taxes by reducing cost basis instead of triggering immediate income tax.
The fund charges a 0.68% expense ratio, and although it's newer -- launched on Jan. 30, 2024 -- it's already showing strong results. Since its inception, it has delivered a 19.84% annualized return, outperforming the CBOE Nasdaq-100 BuyWrite Monthly Index, which returned 14.56% over the same period.
7. Amplify CWP Enhanced Dividend Income ETF
The Amplify CWP Enhanced Dividend Income ETF (DIVO -0.15%) takes a more selective and tactical approach to covered call investing. It starts with a concentrated, actively managed portfolio of 25 to 30 high-quality large-cap U.S. stocks.
NYSEMKT: DIVO
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The fund's managers screen for companies with strong dividends, consistent earnings and cash flow growth, high return on equity, and a solid management track record, spanning most sectors for diversification. Where this ETF stands out is its flexible options overlay. Instead of selling index calls or writing on the entire portfolio, the fund's managers tactically write call options on individual stocks.
They choose the timing, strike prices, and coverage ratios based on market conditions and stock-specific outlooks. This allows for more control over the balance between income and capital appreciation.
As a result, Amplify CWP Enhanced Dividend Income ETF offers a lower trailing-12-month yield of 5.06% but superior long-term total returns. Over the past five years, it has returned 12.07% annualized, outperforming the CBOE S&P 500 BuyWrite Index's 9.33% during the same period.
The expense ratio is 0.56%, which is reasonable for an actively managed covered call ETF with selective stock picking and tactical option execution.
Types of covered call ETFs
Covered call ETFs come in several forms. The easiest way to understand them is to think in pairs of design choices. These are not mutually exclusive. Many ETFs combine multiple approaches as long as they are not directly opposed.
Index-based versus actively managed: Index-based covered call ETFs follow a transparent, rules-driven process. The option writing schedule, strike selection, and coverage ratio are predefined and mechanical. Actively managed covered call ETFs rely on manager discretion, research, and market views to decide when and how aggressively to sell calls. This introduces manager skill risk but can add flexibility.
Physically backed versus synthetic exposure: Physically backed ETFs hold the underlying shares of ETFs and sell call options directly on those positions. Synthetic structures replicate exposure using derivatives, such as swaps or combinations of options and cash. Synthetic exposure can reduce transaction costs or improve tax efficiency but adds counterparty risk.
Type of options used: Covered call ETFs may write options on individual stocks, broad-market ETFs, or indexes. Some use swaps tied to option-selling indexes, while others rely on equity-linked notes that embed option exposure. Each method affects transparency, tax treatment, and tracking behavior.
Should you buy a covered call ETF?
Reasons to consider:
- Ideal for retirees or income-focused investors who want steady, predictable monthly payouts
- Works best in rangebound or high-volatility markets, where stock prices move sideways and option premiums can be collected repeatedly
- Particularly effective in tax-sheltered accounts, such as a Roth IRA (individual retirement account) or tax-free savings account (TFSA), where distributions aren't taxed
Reasons to be cautious:
- Limited upside: The strategy caps potential gains, causing underperformance in strong bull markets.
- Tax inefficiency: Frequent distributions and option income can create a higher tax burden in taxable accounts.
- Not beginner-friendly: Covered call ETFs use derivatives that can behave differently from traditional index funds, making them more complex and harder to use effectively.
- Long-term performance risk: Over time, most covered call ETFs lag traditional index ETFs because of their capped growth and higher costs.
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What to look for in a covered call ETF
Start with methodology. Review how calls are written, including moneyness (i.e., in-the-money, at-the-money, or out-of-the-money), strike selection, expiration length, and amount of portfolio coverage. The underlying holdings also matter. Writing calls on volatile assets generates more income but caps upside more aggressively.
Fees are the next filter. Covered call ETFs typically charge more than plain equity ETFs due to options management and operational complexity. Higher fees reduce net income and long-term returns.
Tax efficiency is often overlooked. Distributions may consist of ordinary income, dividends, capital gains, or return of capital. The mix affects after-tax results and can vary significantly between funds.
Finally, evaluate risk-adjusted returns. Covered call ETFs should lag uncapped benchmarks during strong bull markets. A well-constructed ETF should reduce downside volatility and produce a Sharpe ratio that is comparable to, or better than, the underlying benchmark over time.
